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Five ways GMP equalisation could affect scheme members

Tue, 07/04/2020 - 14:00

One of the first things I wrote about, on joining the pensions industry, was the Barber vs GRE 1990 case, and the possible implications for pension schemes. Nearly 30 years later, this particular saga is not yet fully resolved. Instead, we are still asking questions about how to equalise pension benefits.

Last month, HMRC published the latest piece in this jigsaw. In a newsletter focused on guaranteed minimum pension (GMP) equalisation, it considers some consequences for pension scheme members from this course of action. This is needed because members with contracted-out pensionable service may receive an adjustment to their pension benefits in respect of that equalisation.

Getting additional benefits sounds positive. But in a world where you are tested on the amounts you put into pensions as well as on how much you take out, this extra ‘present’ can raise important questions about operating within the annual allowances and lifetime allowance.

Those people approaching retirement today – and especially those who are bumping up alongside the lifetime allowance or who have breached it – often have a mixture of defined benefit and defined contribution pensions. This adjustment could have knock-on effects for all different types of pension benefits, and advisers will need to consider the implications for their customers.

However, before I go on, there is an important caveat: this is not clear cut. GMP equalisation may mean an increase to the amount of pension a person is due at retirement. This isn’t a new entitlement as the increase results from membership of a pension scheme during the period 1990–97. So, theoretically, this shouldn’t affect annual allowances or break any existing lifetime allowance protection. But nothing is definitive. It will depend on the equalisation method the scheme adopts. HMRC has relayed its views for how benefits should be treated in particular situations, but hasn’t covered all possible approaches, especially for those schemes looking to convert GMPs. Advisers should get in touch with the pension scheme to find out the situation for that particular scheme, not least because a benefit adjustment may affect previous and future benefit crystallisation events (BCEs).

There are five ways a benefit adjustment could affect customers.

They could lose their lifetime allowance protection
When the lifetime allowance fell several times during the last decade, individuals could use Fixed Protection to protect at the previous higher level as long as there were no further contributions or benefit accrual allowed within certain limits. The increase from the benefit adjustment shouldn’t count as benefit accrual, but this may depend on the equalisation method chosen by the scheme. The situation for those with Enhanced Protection is even less clear. And advisers should initially contact scheme administrators.

They may need new lifetime allowance protection
For those members who have primary or individual protection, once the benefit adjustment is added in, the value of the pension rights protected could be higher than originally notified to HMRC. If that is the case, then customers should tell HMRC ‘without undue delay’. If they have Individual Protection 2016, then customers can amend protection online. Otherwise, they need to write to HMRC.
If the adjustment pushes them into a position where they would qualify for protection from the lifetime allowance charge, then individuals can approach HMRC to ask for late notification.

They may need past BCEs recalculating
Where the benefit adjustment means a higher starting pension at retirement, then this could have implications for BCEs. If the BCE has already taken place – the member has started taking the scheme pension or has reached age 75 – then scheme administrators will have to recalculate BCEs. If the BCE is in the future, then this may change the approach to pension planning.

They may have used up more of the lifetime allowance than initially thought
A higher BCE means the member may have used up more of the lifetime allowance than they had originally thought. If the customer also has SIPP benefits, this may have implications, and they may need to get in touch with the SIPP scheme to let them know of the new lifetime allowance usage.

They may have to pay an additional or a new lifetime allowance charge
Where a recalculated BCE results in a member exceeding their lifetime allowance then a lifetime allowance charge will be due. Likewise if the member has already paid a lifetime allowance charge, then the new lifetime allowance usage will mean an additional charge is due.
Scheme administrators are jointly (with the member) expected to account for any charge due directly to HMRC. Scheme members may need to correct a previous self-assessment tax return if a lifetime allowance charge has changed or now applies.

The GMP equalisation saga is not finished. Advisers need to work with scheme administrators of defined benefit schemes and SIPPs to make sure the BCEs reflect the true position and determine what, if any, lifetime allowance charges are due.

Rachel is a Senior Technical Consultant helping financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients. She’s well known within the pensions and savings industry, and regularly speaks at AJ Bell events, alongside writing content and articles for our website.

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